Feb. 29 (Bloomberg) -- Japan’s economic rebound from the
deepest contraction among advanced nations after Greece and
Portugal may be stunted this year as power shortages threaten
its western region.

The Kansai area, which accounts for about a fifth of
Japan’s economy and escaped the worst of electricity cutbacks
after the March 11 earthquake and tsunami, last week lost its
final operating nuclear plant. Power supply may be up to 25
percent less than peak summer demand if plants are not
restarted, according to Kansai Electric Power Co.

Shortages drive up costs and force manufacturers to shift
work schedules to lower-use periods, disrupting supply chains
and adding to reasons to go abroad. The yen’s 47 percent climb
against the dollar in the past five years has already hurt
competitiveness enough to prompt firms from Nissan Motor Co. to
Kansai-based Panasonic Corp. to move some operations overseas.

“Higher energy costs come on top of a strong yen and a
shrinking domestic market for industries from steelmakers to
major manufacturers,” said Martin Schulz, a senior economist at
Fujitsu Research Institute in Tokyo who has done research for
the Bank of Japan. “It’s another reason to shift production
overseas -- another brick in the wall.”

Only two of 54 reactors in Japan are operating after
meltdowns at three of six at Tokyo Electric Power Co.’s
Fukushima plant in last year’s disaster. By late April, a nation
that received about 30 percent of its power from atomic stations
before the quake may be at least temporarily nuclear-free.

‘High Uncertainty’

Nationwide electricity rationing could cut gross domestic
product growth by 1.8 percentage point to 0.1 percent in the
fiscal year starting April by capping industrial production,
discouraging investment and limiting exports, the Institute of
Energy Economics, a government affiliated think-tank estimated
in December.

The potential hit to growth would affect an economy just
starting to gain momentum after contracting for three of the
past four years. The government reported today a larger-than-forecast gain in industrial production in January after retail
sales data yesterday also exceeded estimates.

In Osaka, Kansai’s biggest city, electric wire manufacturer
Sumitomo Electric Industries Ltd. will spend 5 billion yen ($62
million) on generators and other preparations for power
shortages and is also budgeting for energy costs to rise,
President Masayoshi Matsumoto says. “With 6 to 7 billion yen,
we could build a plant in Vietnam and make profit,” Matsumoto
said. “Moving production overseas is of course one of the
options we are considering.”

Rating at Risk

A diminishing manufacturing base and energy constraints
threaten to add to deflation, the world’s biggest public debt
burden, and an ageing population in hobbling an economy that’s
smaller now in nominal terms than it was in 1995. Gross domestic
product shrank 0.9 percent last year, compared with
International Monetary Fund estimates in September of declines
of 2.2 percent for Portugal and 5 percent for Greece.

Standard & Poor’s said last week that Japan’s AA- debt
rating, the fourth-highest ranking, may be cut again if growth
prospects worsen in the medium-term, while the Bank of Japan
referred to “high uncertainty” over power supplies when easing
monetary policy on Feb. 14. Liquefied natural gas imports rose
to a record in January and the nation had its biggest monthly
trade deficit.

The yen traded at 80.58 per dollar yesterday, compared with
a post World War II high of 75.35 in October.

‘Biggest Concern’

“The biggest concern from this electricity shortage is
that we are making companies have no choice but to move
overseas,” said Shigeru Suehiro, head of statistics at the
Institute of Energy Economics, a Ministry of Economy, Trade and
Industry affiliated think-tank founded in 1966. “It will leave
a significant impact on Japan’s economy.”

Panasonic, the world’s largest maker of plasma televisions,
said in November it would build a solar cell plant in Malaysia.
Nissan, Japan’s second-biggest carmaker, shifted output of its
March compact from Japan to Thailand in March 2010, citing the
yen’s strength.

Last year, officials imposed 15 percent reductions for
heavy power users in the wrecked northeast region of Tohoku and
in the Kanto area where Tokyo sits. In the rest of the country,
reductions were voluntary.

At the industry ministry, Noriyuki Mita, a policy planning
division director, said that while officials want to avoid
mandatory electricity limits, that depends on decisions about
nuclear power. A group of four cabinet ministers, led by Prime
Minister Yoshihiko Noda, will decide if or when reactors closed
for servicing can restart after last year’s disaster raised
safety concerns.

Stress Tests

All 11 of Kansai Electric’s reactors are now out of
service. While two may be ready to restart in April, Noda said
Feb. 10 that even if reactors pass stress tests and are
technically ready, the government won’t give approvals to power
companies unless local authorities agree.

Around the country, only three of 29 local governments
housing plants will accept restarts, with 24 authorities
undecided and two against, the Sankei newspaper reported Feb. 4.
In Kansai, officials have signaled opposition.

“Last year we took measures such as moving days off to
conserve power by the 10 percent we were requested,” said
Shinki Kawanami, a spokesman for Maruichi Steel Tube Ltd., a
pipe and tube manufacturer based in Osaka that supplies
Mitsubishi Corp. “This summer will be much tougher,” he said,
adding that the company has looked at shifting production to
plants in other places.

Extreme Option

Electronic equipment maker Daihen Corp., also based in
Osaka, and a supplier to Kansai Electric, sees shifting
production elsewhere as “an extreme option,” according to
environmental section chief Koji Moriyama. “We hope that, once
safety is taken into account, nuclear plants will be restarted
quickly,” he said.

Industry Minister Yukio Edano told BS Asahi television on
Feb. 24 that it’s “necessary” to restart nuclear reactors to
avoid power shortages, provided that it can be done safely and
with the agreement of local residents.

In the west, some people express skepticism that any
action will come quickly enough.

“I think people are underestimating the impact of this
electricity shortfall,” said Masataka Nakagawa, head of the
economy and industry department at the Osaka Chamber of Commerce
and Industry. Telling manufacturers to save power again this
summer is “like asking someone who’s already skin-and-bones to
go on a diet.”